<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB
(Mark One)
     [X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2004

                                       or

     [ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                         Commission File Number 0-12950

                          ALLIANCE PHARMACEUTICAL CORP.
             (Exact name of Registrant as specified in its charter)

New York                                                  14-1644018
--------------------------------------                    ----------------------
(State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                         Identification Number)

4660 La Jolla Village Dr, #825
San Diego, California                                     92122
--------------------------------------                    ----------------------
(Address of principal                                     Zip Code
executive offices)

Registrant's telephone number,
including area code:                                      (858) 410-5200
                                                          ----------------------

Indicate by a check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.

                          Yes [X]          No [ ]

As of February 9, 2005, Registrant had 33,120,206 shares of its Common Stock,
$.01 par value, outstanding.



<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------



INDEX
-----

                                                                        Page No.
                                                                        --------



PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet (unaudited)                      3

         Condensed Consolidated Statements of Operations (unaudited)           4

         Condensed Consolidated Statements of Cash Flows (unaudited)           5

         Notes to Unaudited Condensed Consolidated Financial Statements        6



Item 2.  Management's Discussion and Analysis or Plan of Operation            14



Item 3.  Controls and Procedures                                              19



PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                    20

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds          21

Item 3.  Defaults Upon Senior Securities                                      21

Item 4.  Submission of Matters to a Vote of Security Holders                  22

Item 5   Other Information                                                    22

Item 6.  Exhibits                                                             23

                                        2


<PAGE>
<TABLE>

PART I FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS


         ALLIANCE PHARMACEUTICAL CORP.
         CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------------------------------------------------------------------
                                                                                     DECEMBER 31,
                                                                                        2004
                                                                                   ----------------
ASSETS                                                                              (UNAUDITED)
------
<S>                                                                                 <C>

CURRENT ASSETS:
         Cash and cash equivalents                                                  $   6,296,000
         Other current assets                                                             110,000
                                                                                    --------------
                             Total current assets                                       6,406,000

PROPERTY AND EQUIPMENT - NET                                                               42,000
RESTRICTED CASH                                                                         1,000,000
OTHER ASSETS - NET                                                                         12,000
                                                                                    --------------
                                                                                    $   7,460,000
                                                                                    ==============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
         Accounts payable                                                           $   1,119,000
         Accrued expenses                                                               1,354,000
         Senior convertible notes payable                                              11,362,000
                                                                                    --------------
                             Total current liabilities                                 13,835,000


OTHER LIABILITIES                                                                       1,250,000

STOCKHOLDERS' DEFICIT:
         Preferred stock - $.01 par value; 5,000,000 shares authorized;
                 Series F preferred stock - 793,750 issued and
                 outstanding at
                 December 31, 2004                                                          8,000
         Common stock - $.01 par value; 125,000,000 shares authorized;
                 31,922,532 shares issued and outstanding at December 31, 2004            319,000
         Additional paid-in capital                                                   474,858,000
         Accumulated deficit                                                         (482,810,000)
                                                                                    --------------
                             Total stockholders' deficit                               (7,625,000)
                                                                                    --------------
                                                                                    $   7,460,000
                                                                                    ==============
</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                 3


<PAGE>
<TABLE>

    ALLIANCE PHARMACEUTICAL CORP.
    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------------

                                                          THREE MONTHS ENDED                     SIX MONTHS ENDED
                                                              DECEMBER 31,                          DECEMBER 31,
                                                       2004                2003              2004               2003
                                                   -------------      -------------      -------------      -------------
                                                            (UNAUDITED)                            (UNAUDITED)
<S>                                                <C>                <C>                <C>                <C>
REVENUES:
        Royalty, license and research revenue      $     25,000       $     47,000       $     72,000       $     64,000

OPERATING EXPENSES:
        Research and development                        239,000            209,000          1,199,000            383,000
        General and administrative                      569,000            337,000          1,206,000            465,000
                                                   -------------      -------------      -------------      -------------
                                                        808,000            546,000          2,405,000            848,000
                                                   -------------      -------------      -------------      -------------
LOSS FROM OPERATIONS                                   (783,000)          (499,000)        (2,333,000)          (784,000)

INVESTMENT INCOME                                        34,000              2,000             65,000              6,000
OTHER INCOME                                             10,000             12,000             10,000             84,000
INTEREST EXPENSE                                       (160,000)        (2,078,000)        (2,409,000)        (2,156,000)
GAIN ON DISPOSITION OF ASSETS                           116,000            513,000            259,000          2,412,000
                                                   -------------      -------------      -------------      -------------
NET LOSS                                           $   (783,000)      $ (2,050,000)      $ (4,408,000)      $   (438,000)
                                                   =============      =============      =============      =============

NET LOSS PER COMMON SHARE,
                        BASIC AND DILUTED          $      (0.02)      $      (0.07)      $      (0.10)      $      (0.02)
                                                   =============      =============      =============      =============

WEIGHTED AVERAGE SHARES OUTSTANDING,
                        BASIC AND DILUTED            31,787,000         28,301,000         44,632,000         28,140,000
                                                   =============      =============      =============      =============
</TABLE>


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                           4


<PAGE>
<TABLE>

        ALLIANCE PHARMACEUTICAL CORP.
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------
                                                                                      SIX MONTHS ENDED
                                                                                         DECEMBER 31,
                                                                                   2004               2003
                                                                               -------------      -------------
                                                                                          (UNAUDITED)
<S>                                                                            <C>                <C>
OPERATING ACTIVITIES:
      Net loss                                                                 $ (4,408,000)      $   (438,000)
      Adjustments to reconcile net loss to net cash used in operations:
             Depreciation and amortization                                            5,000                 --
             Accrued interest on senior convertible notes payable                   170,000                 --
             Compensatory stock options                                               2,000              3,000
             Beneficial conversion expense                                        2,238,000          2,000,000
             Gain on disposition of asset                                          (259,000)        (2,412,000)
             Changes in operating assets and liabilities:
                   Restricted cash and other assets                                  25,000            567,000
                   Accounts payable, accrued expenses and other liability             5,000         (1,467,000)
                                                                               -------------      -------------
Net cash used in operating activities                                            (2,222,000)        (1,747,000)
                                                                               -------------      -------------

INVESTING ACTIVITIES:
      Property and equipment                                                         (1,000)                --
      Proceeds from disposition of assets                                            90,000            760,000
                                                                               -------------      -------------
Net cash provided by investing activities                                            89,000            760,000
                                                                               -------------      -------------

FINANCING ACTIVITIES:
      Issuance of common stock                                                           --            145,000
      Proceeds from debt                                                                 --            500,000
                                                                               -------------      -------------
Net cash provided by financing activities                                                --            645,000
                                                                               -------------      -------------

DECREASE IN CASH AND CASH EQUIVALENTS                                            (2,133,000)          (342,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  8,429,000            763,000
                                                                               -------------      -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     $  6,296,000       $    421,000
                                                                               =============      =============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for cancellation of warrant               $     25,000       $         --
                                                                               =============      =============
Issuance of senior convertible notes for common stock                          $ 10,692,000       $         --
                                                                               =============      =============
Issuance of senior convertible notes for secured convertible note              $    500,000       $         --
                                                                               =============      =============
Reclassification of warrant liability                                          $  7,942,000       $         --
                                                                               =============      =============
</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                           5


<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
------------

         Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company", "Alliance", "we" or "us") are engaged in identifying, designing, and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to reduce the need for donor blood in surgical and other patients at
risk of acute tissue hypoxia (oxygen deficiency). In addition, Alliance is
developing intellectual property and know-how for potential products to treat
immune disorders, including autoimmune disease, cancer and infectious disease.

LIQUIDITY AND BASIS OF PRESENTATION
-----------------------------------

         The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through December 31, 2004 and has negative working capital at
that date of approximately $7.4 million, which among other factors, raise
substantial doubt about its ability to continue as a going concern.

         The Company believes it has sufficient working capital to fund its
operations for the next 12 months. As discussed in Note 4, in June 2004, the
Company completed a private placement of its common stock with net proceeds to
the Company of approximately $10 million (the "June Private Placement"). In
September 2004, the terms of the June Private Placement were rescinded by mutual
agreement of the Company and investors holding approximately $10.7 million of
the original $11 million invested by the various investors in the June Private
Placement. Concurrently, the investors who elected to rescind the June Private
Placement were issued senior convertible promissory notes in like investment
amounts (the "Senior Notes"). Due to certain restrictive covenants, including,
without limitation, a covenant that the Company maintain at least $5.5 million
in cash or cash equivalents on hand at all times while the Senior Notes are
outstanding, the Senior Notes may become current prior to June 30, 2005. If this
were to occur, the Company would have to raise additional funds to repay the
Senior Notes or renegotiate their terms. The accompanying unaudited condensed
consolidated financial statements do not include the adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.

PRINCIPLES OF CONSOLIDATION
---------------------------

         The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., the accounts of its wholly owned subsidiaries Molecular
Biosystems, Inc. ("MBI"), Astral, Inc. ("Astral"), MDV Technologies, Inc.,
Alliance Pharmaceutical GmbH, its majority-owned subsidiary Talco
Pharmaceutical, Inc., and its majority-owned subsidiary PFC Therapeutics, LLC
("PFC Therapeutics") from June 18, 2003, when Alliance acquired Baxter
Healthcare Corporation's ("Baxter") ownership interest. The Company's
subsidiaries have minimal operations and all significant intercompany accounts
and transactions have been eliminated.

INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS
------------------------------------------------

         The condensed consolidated balance sheet as of December 31, 2004, the
condensed consolidated statements of operations for the three months and six
months ended December 31, 2004 and 2003, and the condensed consolidated
statements of cash flows for the six months ended December 31, 2004 and 2003 are
unaudited. In the opinion of management, such unaudited financial statements


                                       6


<PAGE>

include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results for the periods presented. Interim
results are not necessarily indicative of the results to be expected for the
full year. The financial statements should be read in conjunction with the
Company's audited consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended June
30, 2004.

USE OF ESTIMATES
----------------

         The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the condensed consolidated
financial statements. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS
-------------------------

         The Company considers instruments purchased with an original maturity
of three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK
----------------------------

         Cash and cash equivalents are financial instruments that potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and debt instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
modified to take advantage of trends in yields and interest rates.

REVENUE RECOGNITION
-------------------

         Revenue is generally recognized when all contractual obligations have
been satisfied and collection of the resulting receivable is reasonably assured.

         LICENSING AND ROYALTY REVENUES
         ------------------------------
         Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

         Research and development expenditures are charged to expense as
incurred. Research and development expenditures include the cost of salaries and
benefits for clinical, scientific, manufacturing, engineering and operations
personnel, payments to outside researchers for preclinical and clinical trials
and other product development work, payments related to facility lease and
utility expenses, depreciation and amortization, patent costs, as well as other
expenditures. In the six-month periods ended December 31, 2004 and 2003, the
Company incurred research and development expenses of $1.2 million and $383,000,
respectively.

COMPUTATION OF NET LOSS PER COMMON SHARE
----------------------------------------

         Basic loss per share was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. All
potential dilutive common shares have been excluded from the calculation of
diluted loss per share for the three months and six months ended December 31,
2004 and 2003, as their inclusion would be anti-dilutive.

                                       7


<PAGE>

ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------

         The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". The Company in its financial statements applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans, and
accordingly, no compensation cost has been recognized for stock options in the
three-month and six-month periods ended December 31, 2004 or 2003. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date and amortized to expense over their vesting
period as prescribed by SFAS No. 123, the Company's net loss and net loss per
share would have been adjusted to the pro forma amounts indicated below for the
three months and six months ended December 31:

<TABLE>
                                        THREE MONTHS ENDED  THREE MONTHS ENDED    SIX MONTHS ENDED    SIX MONTHS ENDED
                                           DECEMBER 31,         DECEMBER 31,         DECEMBER 31,        DECEMBER 31,
                                               2004                 2003                 2004                2003
                                           ------------         ------------         ------------        ------------
<S>                                        <C>                  <C>                  <C>                 <C>
Net loss:
        As reported                        $  (783,000)         $(2,050,000)         $(4,408,000)        $  (438,000)
        Fair value of stock-based
               employee compensation          (157,000)            (198,000)            (317,000)           (393,000)
                                           ------------         ------------         ------------        ------------
        Pro forma                          $  (940,000)         $(2,248,000)         $(4,725,000)        $  (831,000)
                                           ============         ============         ============        ============

Net loss per share, basic and diluted
        As reported                        $     (0.02)         $     (0.07)         $     (0.10)        $     (0.02)
        Pro forma                          $     (0.03)         $     (0.08)         $     (0.11)        $     (0.03)
</TABLE>

         The impact of outstanding non-vested stock options granted prior to
1996 (the effective date of SFAS 123) has been excluded from the pro forma
calculations; accordingly, the pro forma adjustments for the three-month and
six-month periods ended December 31, 2004 and 2003 are not indicative of future
period pro forma adjustments if the calculation reflected all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for the
periods, respectively: risk-free interest rate range of 1.7% to 4.6% and 3.25%
to 6.5%; dividend yield of 0% for all periods; volatility factor of 139% and
135%; and a weighted-average expected term of 7 years for all periods. The
estimated weighted average fair value at grant date for the options granted
during the periods ended December 31, 2004 and 2003 was $0.24 and $0.16 per
option, respectively.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" Statement 123(R) to provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial


                                       8


<PAGE>

statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005. The
Company is in the process of evaluating whether the adoption of SFAS 123(R) will
have a significant impact on the Company's overall results of operations or
financial position.

COMPREHENSIVE INCOME (LOSS)
---------------------------

         The Company did not have any items of comprehensive income during the
three-month and six-month periods ended December 31, 2004 and 2003.

2. PFC THERAPEUTICS, LLC

         In June 2003, Alliance acquired Baxter's 50% interest in PFC
Therapeutics in exchange for contingent payments to Baxter based on the future
commercial sales of OXYGENT and other products. The fee to Baxter is 2% of all
of Alliance's or PFC Therapeutics' future gross sales, if any, of the products,
with a maximum fee of $30 million. In accordance with SFAS No. 141, BUSINESS
COMBINATIONS, the Company has not recorded the value of the potential
consideration to be issued to Baxter for Baxter's ownership interest in PFC
Therapeutics as the future payments are contingent on future commercial sales of
an undeveloped product.

         PFC Therapeutics has had no operating activity (except the purchase of
the prepaid royalty of $10 million from Alliance in 2000) since inception of the
joint venture.

         Also in June 2003, Alliance and certain of its creditors entered into
an agreement (the "Participation Agreement"), which, among other things, granted
each creditor an ownership interest in the OXYGENT Business (as defined in the
Participation Agreement). In April 2004, Alliance agreed to issue each of these
creditors a warrant to purchase a certain number of shares of Alliance's common
stock. In exchange for the issuance of the warrants, these creditors agreed to
assign all of their rights under the Participation Agreement to Alliance. The
fair value of the warrants issued as determined using Black-Scholes was $2.3
million as recorded in fiscal year 2004. The total ownership interest the
creditors assigned back to Alliance was 11.2% during fiscal year 2004.

         On April 5, 2004, PFC Therapeutics, and Nycomed Denmark ApS
("Nycomed"), a leading European pharmaceutical company, signed a collaboration
agreement for Nycomed to develop and commercialize OXYGENT in Europe (the
"Nycomed Agreement"). Under the terms of the agreement, Nycomed was to be
responsible for the remaining clinical and regulatory development, and future
marketing of OXYGENT within a broad European territory. The agreement also
included an option for Nycomed to acquire OXYGENT rights for China. On July 2,
2004, Nycomed notified Alliance that it was terminating the agreement effective
August 16, 2004. Therefore, the rights to OXYGENT in Europe and China have
reverted back to PFC Therapeutics, and the Company is actively looking for a new
partner or partners to develop and commercialize OXYGENT in both of these
regions.

         On April 19, 2004, PFC Therapeutics and Il Yang Pharm. Co., Ltd. ("Il
Yang"), a leading South Korean pharmaceutical research and development and
marketing company, signed a licensing, development and marketing agreement
granting Il Yang exclusive rights to promote, market, distribute and sell
OXYGENT for any approved clinical use, including all future approved uses, in
South Korea. Under terms of the agreement, PFC Therapeutics will be initially
responsible for the commercial supply of OXYGENT to Il Yang and will receive a
royalty on OXYGENT sales following commercialization. Il Yang will also make
certain future payments on the completion of various regulatory milestones for
development in Europe and the U.S.

                                       9


<PAGE>


         On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one
of the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an Exclusivity
Agreement to enter into a License Agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada. The terms of the
License Agreement, if entered into, will include certain initial and future
payments to PFC Therapeutics upon the completion of various regulatory and
commercial milestones for OXYGENT development in Europe and royalties on
commercial sales of OXYGENT in Europe and Canada.

3. SALE OF IMAGENT(R) BUSINESS

         On June 18, 2003, Imcor Pharmaceutical Co. ("Imcor"), formerly known as
Photogen Technologies, Inc., acquired certain assets and assumed certain
liabilities from Alliance. The assets acquired by Imcor included all of
Alliance's assets related to designing, developing, manufacturing, marketing,
selling, licensing, supporting and maintaining its IMAGENT product, an
ultrasound contrast agent that was approved by the Federal Food & Drug
Administration ("FDA") for marketing in the U.S. in June 2002. The amount of
consideration was determined through arms-length negotiation. To the extent
obligations with certain creditors were completely settled, Alliance recorded a
gain from sale of assets of $10.6 million during the year ended June 30, 2003,
$15 million during the year ended June 30, 2004, and $259,000 for the six months
ended December 31, 2004 related to the disposition of this asset.

         For the six months ended December 31, 2004, Alliance recorded $259,000
as a gain on the disposition of an asset as a result of Imcor funding $90,000 of
Alliance's obligations, and $169,000 related to creditor settlements or Imcor's
assumed obligations of Alliance. To date, Alliance has recorded $25.9 million as
a gain on the disposition of an asset as a result of Imcor issuing shares of its
stock valued at $3.7 million to Alliance creditors, Imcor funding $1.6 million
of Alliance's obligations, and $20.5 million related to settlement agreements or
Imcor's assumed obligations of Alliance. The remaining required cash payments by
Imcor will not be applied against the corresponding liabilities of Alliance
until Alliance is legally released from the associated liabilities. Alliance
will record an additional gain on disposition of asset at the time that Alliance
is legally released from the liabilities. The balance owed by Imcor to Alliance
to settle remaining liabilities at December 31, 2004 was approximately $270,000.

         In addition, subsequent to the closing and through 2010, Imcor is
obligated to pay Alliance further consideration in the form of an earn-out based
on IMAGENT revenue invoiced (subject to certain reductions).

         The amount of the earn-out will equal, for each year of the earn-out:
(i) 7.5% of IMAGENT revenue up to $20 million; (ii) 10% of IMAGENT revenue
between $20 million and $30 million; (iii) 15% of IMAGENT revenue between $30
million and $40 million; and (iv) 20% of IMAGENT revenue above $40 million. The
earn-out will be reduced by amounts Imcor must pay pursuant to a license
agreement with Schering Aktiengesellschaft ("Schering"), net of payments they
receive from Schering under the license, and amounts of any indemnification
claims Imcor has against Alliance. The earn-out is subject to three additional
offsets (which are to be applied in the manner described in the Asset Purchase
Agreement dated June 18, 2003 by and between Alliance and Imcor (the "Asset
Purchase Agreement")) that entitle Imcor to retain portions of the earn-out
otherwise payable to Alliance:

         o        Up to approximately $1.6 million for an earn-out reduction,
                  depending on the satisfaction of certain conditions;

         o        The amount of any payments not committed to at closing that
                  Imcor makes after the closing to Alliance's creditors plus up
                  to $1 million of litigation expenses for certain patent and
                  other litigation; and

                                       10


<PAGE>

         o        Between $4 million and $5 million, which is the principal and
                  accrued interest under Imcor's prior bridge loans to Alliance,
                  depending on the satisfaction of certain conditions.

         The detail of items comprising the gain on disposition of IMAGENT
assets for the six months ended December 31, 2004 and 2003 is calculated as
follows (in thousands):

<TABLE>
             SIX MONTHS ENDED DECEMBER 31:                        2004        2003
                                                                 ------      -------
<S>                                                              <C>         <C>
Cash payments funded by Imcor for liabilities of Alliance        $   90      $  760
Assumption by Imcor of operating liabilities and other debt
  and settlements with vendors and creditors of Alliance            169       1,652
                                                                 -------     -------
Gain on sale of assets of IMAGENT to Imcor                       $  259      $2,412
                                                                 =======     =======
</TABLE>

4. DEBT OBLIGATIONS

PFC NOTE
--------

         On November 20, 2003, PFC Therapeutics issued a secured convertible
note in the principal amount of $500,000 (the "PFC Note") to an investor. The
investor also received a warrant to purchase a number of units of ownership
interests of PFC Therapeutics representing 10% of its issued and outstanding
units (determined on a fully-diluted basis on the date of exercise of the
warrant) at an exercise price of $0.01 per unit, at any time or from time to
time from January 31, 2004 to and including January 31, 2009. The principal
amount of the PFC Note was classified in the other liabilities section of the
consolidated balance sheet at June 30, 2004. The Company had recorded imputed
interest expense of $1 million based on the estimated fair value of the warrant.
In September 2004, the holder of the PFC Note exchanged such warrant for
2,500,000 shares of common stock of the Company, which were issued in October
2004, valued at $1 million based on the estimated fair value on the date of
grant, and the PFC Note for a Senior Note (described below) in the principal
amount of $500,000 payable directly by the Company. The principal plus interest
due on all of the Senior Notes is included in the current liabilities section of
the unaudited condensed consolidated balance sheet at December 31, 2004.

JUNE PRIVATE PLACEMENT
----------------------

         In June 2004, the Company completed its June Private Placement, a
private placement of 31,427,137 shares of its common stock for aggregate gross
proceeds of approximately $11 million. Net proceeds from the transaction, after
issuance costs and placement fees, were approximately $10 million. In connection
with this transaction, the Company also issued five-year warrants to purchase an
additional 23,570,357 shares of its common stock at an exercise price of $0.50
per share. In addition, the Company issued warrants to the placement agent to
purchase 1,571,357 shares of its common stock. Pursuant to the terms of the
registration rights agreements entered into in connection with the June Private
Placement, the Company was required to pay a cash penalty if it failed to file
with the SEC a registration statement under the Securities Act of 1933, as
amended, covering the resale of all of the common stock purchased and the common
stock underlying the issued warrants, including the common stock underlying the
placement agent's warrants. The fair value of the warrants was estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividend, risk-free interest rate of 3.4%, the contractual life of 5 years and
volatility of 139%. In accordance with Emerging Issues Task Force ("EITF") No.
00-19, "Accounting for Derivative Financial Instruments Indexed To and
Potentially Settled In a Company's Own Common Stock", the estimated fair value
in the amount of $7.9 million was recorded as a liability, with an offsetting
charge to additional paid-in capital at June 30, 2004. The warrant liability was
reclassified to additional paid-in capital as of September 30, 2004, the date of
effectiveness of the registration statement, which is the date the potential for
a cash penalty ceased.

                                       11


<PAGE>

         On July 2, 2004, Nycomed notified the Company that it was unilaterally
terminating the Nycomed Agreement (see Note 2) effective August 16, 2004.
Subsequently, a dispute arose between the Company and some of its investors who
participated in the June Private Placement. After considering all of the facts
and circumstances relevant to the dispute, the Company's board of directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June Private
Placement.

         On September 24, 2004, investors holding 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the approximately $11 million invested in the
June Private Placement elected to rescind the June Private Placement. In doing
so, each of these investors returned to the Company its stock certificate
representing the number of shares and the warrant that it received in the June
Private Placement for cancellation. Immediately thereafter, these same investors
entered into the Senior Note Purchase Agreement whereby the Company issued to
such investors Senior Notes convertible into common stock at $0.25 per share in
principal amounts equal to the amounts such investors invested in the June
Private Placement.

         After giving effect to both transactions, the Company issued 880,714
shares of common stock, warrants to purchase 660,536 shares of common stock
remained outstanding from the June Private Placement, and the Company issued
Senior Notes in an aggregate principal amount of approximately $10.7 million.

         The Company recorded a beneficial conversion feature ("BCF") charge of
$2.2 million (included in interest expense) at September 30, 2004, based on the
difference between the $0.25 conversion rate of the Senior Notes and the closing
price of $0.30 of the Company's common stock on September 24, 2004. Such BCF
charge includes the conversion of the $500,000 PFC Note.

         The Senior Notes are due the earlier of March 24, 2006, or an event of
default (as defined). The Senior Notes can be converted at anytime prior to the
maturity date at the conversion price of $0.25. Due to certain restrictive
covenants, including, without limitation, a covenant that the Company maintain
at least $5.5 million in cash or cash equivalents on hand at all times while the
Senior Notes are outstanding, the Senior Notes may become current prior to June
30, 2005. Based on these covenants, the Company has recorded the Senior Notes
and the accrued interest on such notes as a current liability.

ASTRAL LIABILITIES
------------------

         In December 2002, we entered into an exclusive license agreement with
Mixture Sciences, Inc. ("Mixture Sciences") for Mixture Sciences to acquire all
rights to a proprietary immunotherapy platform technology developed by Astral.
Mixture Sciences provided financing to support the overhead and salaries of key
employees involved with this technology for a secured position in the technology
subject to a royalty-bearing license. We had certain rights to repurchase the
technology by paying Mixture Sciences a break-up fee. In satisfaction of the
break-up fee, Astral assigned two Patent Cooperation Treaty ("PCT") applications
to Mixture Sciences. We recorded the funds received from Mixture Sciences
totaling $285,000 as license revenues during the year ended June 30, 2004. On
September 27, 2004, Astral and Mixture Sciences entered into an assignment
agreement whereby Mixture Sciences reassigned all rights to the proprietary
immunotherapy platform, including the PCT applications, back to Astral in
exchange for payments of $300,000 of cash and $420,000 of stock of either Astral
or Alliance, which must be paid prior to December 31, 2005. Upon the signing of
the agreement the Company made the first cash payment of $100,000 to Mixture
Sciences and recorded the remaining cash payments of $200,000 and the $420,000
of stock due as accrued expenses, which is included in the condensed
consolidated balance sheet at December 31, 2004.

                                       12


<PAGE>

OTHER COMMITMENTS
-----------------

         Pursuant to a settlement agreement with a former landlord, the Company
has a commitment to pay $420,000 over the next 9 months. Alliance has made
payments totaling $265,000 and has included the balance of the compromised
amount in current liabilities in the condensed consolidated balance sheet at
December 31, 2004.

5. PREFERRED STOCK

         In May 2000, Alliance entered into a joint venture with Baxter and sold
500,000 shares of its Series F Preferred Stock for $20 million. Subsequently,
the Company sold 293,750 additional shares for $11.75 million. The shares are
convertible at the option of Baxter.

         In March 2004, Alliance terminated its license agreement with PFC
Therapeutics and therefore, the conversion price of the Series F Preferred Stock
to common stock is fixed at $50 per common share (post-reverse split of 5:1).
Based on this conversion price, the outstanding shares of Series F Preferred
Stock are convertible into 635,000 shares of common stock. The Company has
accounted for the Series F Preferred Stock as a component of stockholders'
equity.

6. SUBSEQUENT EVENTS

         On January 28, 2005, MBI settled a lawsuit filed in December 2001,
which alleged that MBI breached a license agreement and the plaintiff sought
damages and a declaratory judgment terminating the license agreement and payment
of fees and expenses. Per the terms of the settlement, MBI paid no money to the
plaintiff and agreed to return patent rights to the plaintiff in the countries
of Japan, South Korea and Taiwan.

         Subsequent to December 31, 2004 and as of February 9, 2005, holders of
certain Senior Notes converted an aggregate of $295,000 in principal amount and
$4,419 in accrued interest into an aggregate of 1,197,674 of our common stock at
a conversion price of $0.25 per share.

                                       13


<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

(References to years are to the Company's fiscal years ended June 30.)

PLAN OF OPERATIONS
------------------

         Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and, as of
December 31, 2004, have an accumulated deficit of $482.8 million. We expect to
incur significant operating losses over at least the next few years as we
continue our research and product development efforts and attempt to
commercialize our products.

         Our revenues from operations have come primarily from collaborations
with corporate partners, including research and development, milestone and
royalty payments. Our expenses have consisted primarily of research and
development costs and administrative costs. To date, our revenues from the sale
of products have not been significant. We believe our future operating results
may be subject to quarterly fluctuations due to a variety of factors, including
the timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

FORWARD-LOOKING INFORMATION
---------------------------

         Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2005, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the inability to obtain adequate financing for the Company's
development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such
relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process, including uncertainties associated with
FDA decisions and timing on product development or approval; and the
uncertainties associated with obtaining and enforcing patents important to the
Company's business; and possible competition from other products. Furthermore,
even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the
potential products will be found ineffective during clinical trials; failure to
receive necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties. The research, development, and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the Securities and Exchange Commission from time to time,
including the Company's most recently filed Annual Report on Form 10-KSB, and
you are encouraged to read the section entitled, "Risk Factors" included in the
Company's most recently filed Annual Report on Form 10-KSB.

                                       14


<PAGE>

RESEARCH AND DEVELOPMENT
------------------------

         For the six months ended December 31, 2004 and 2003, we incurred
research and development expenses of $307,000 and $209,000, respectively, for
OXYGENT, an intravascular oxygen carrier that we are developing to augment
oxygen delivery in surgical and other patients at risk of acute oxygen deficit.
Research and development costs to date for our oxygen-therapeutic product
candidates, including OXYGENT, total approximately $156.3 million. While
difficult to predict, we estimate that the completion of clinical trials for
OXYGENT will cost at least an additional $60 million. We do not anticipate that
OXYGENT will reach the market for several years, if at all, and, because of the
numerous risks and uncertainties associated with product development efforts, we
are unable to predict with any certainty the extent of any future expenditures
or when material net cash inflows from OXYGENT may commence, if at all.

         Astral, our wholly owned subsidiary, is engaged in the development of
immunoglobulins that are engineered to bear specific disease-associated
peptides. For the six months ended December 31, 2004 and 2003, Astral incurred
research and development expenses of $892,000, largely due to the $720,000
expense of the assignment of intellectual property agreement with Mixture
Sciences, and $174,000, respectively. Astral's research and development costs to
date total approximately $12 million. Because of the numerous risks and
uncertainties associated with early-stage technology platform research efforts,
we are unable to estimate with any certainty the costs of continued development
of Astral's product candidates for commercialization. We do not anticipate that
any of Astral's early-stage product candidates will reach the market for at
least several years, if at all.

         In December 2002, we entered into an exclusive license agreement with
Mixture Sciences for Mixture Sciences to acquire all rights to a proprietary
immunotherapy platform technology developed by Astral. Mixture Sciences provided
financing to support the overhead and salaries of key employees involved with
this technology for a secured position in the technology subject to a
royalty-bearing license. We had certain rights to repurchase the technology by
paying Mixture Sciences a break-up fee. In satisfaction of the break-up fee,
Astral assigned two PCT applications to Mixture Sciences. We recorded the funds
received from Mixture Sciences totaling $285,000 as license revenues during the
year ended June 30, 2004. On September 27, 2004, Astral and Mixture Sciences
entered into an assignment agreement whereby Mixture Sciences reassigned all
rights to the proprietary immunotherapy platform, including the PCT
applications, back to Astral in exchange for payments of $300,000 of cash and
$420,000 of stock of either Astral or Alliance. Upon the signing of the
agreement the Company made the first cash payment of $100,000 to Mixture
Sciences and recorded the remaining cash payments of $200,000 and the $420,000
fair value of common stock due as accrued expenses, which are included in the
condensed consolidated balance sheet at December 31, 2004.

RESULTS OF OPERATIONS
---------------------

SIX MONTHS ENDED DECEMBER 31, 2004 AS COMPARED WITH SIX MONTHS ENDED DECEMBER
31, 2003

         For the six months ended December 31, 2004, we recorded a gain on the
disposition of the IMAGENT assets of $259,000, resulting from the recording of
payments from Imcor of $90,000 to fund our obligations, and the assumption by
Imcor of certain of our obligations and settlements with various vendors and
creditors of $169,000 during the period in connection with the IMAGENT asset
sale transaction. For the six months ended December 31, 2003, we recorded a gain
of $2.4 million, resulting from the recording of payments of $760,000 from
Imcor, and the assumption by Imcor of obligations and settlements with various
vendors and creditors of $1.7 million during the period.

                                       15


<PAGE>

         Our revenue increased to $72,000 for the six months ended December 31,
2004, compared to $64,000 for the six months ended December 31, 2003. This
increase was primarily due to an increase in royalties received from sales other
than IMAGENT.

         Research and development expenses increased by $816,000, or 213%, to
$1.2 million for the six months ended December 31, 2004, compared to $383,000
for the six months ended December 31, 2003. The increase in research and
development expenses was primarily due to the recording of the $720,000 expense
of the Mixture Sciences assignment agreement whereby Astral reacquired all
rights to certain intellectual property and an increase of $96,000 spent on
OXYGENT-related activities.

         General and administrative expenses increased by $741,000, or 159%, to
$1.2 million for the six months ended December 31, 2004, compared to $465,000
for the six months ended December 31, 2003. The increase in general and
administrative expenses was primarily due to a $679,000 increase in legal and
accounting fees related to the June Private Placement rescission activities,
including the registration of the stock underlying the Senior Notes, and $62,000
increase in public company expenses due to the timing difference between the two
annual meetings.

         Investment income increased by $59,000 to $65,000 for the six months
ended December 31, 2004, compared to $6,000 for the six months ended December
31, 2003. The increase was primarily a result of higher cash balances during the
period because of the receipt of funds from the June Private Placement.

         Other income was $10,000 for the six months ended December 31, 2004, a
result of proceeds recorded from the sale of raw material, compared to $84,000
for the six months ended December 31, 2003, which was primarily a result of
proceeds recorded from insurance dividends and distributions (most of which was
reclassified at June 30, 2004).

         Interest expense was $2.4 million for the six months ended December 31,
2004, compared to $2.2 million for the six months ended December 31, 2003. The
expense for the current period was primarily the result of the BCF expense
recorded in connection with the exchange of the Company's common stock for the
Senior Notes on September 24, 2004 and the accrued interest on such Senior
Notes. The expense for the prior period was primarily the result of the
valuation of the warrant and estimated fair value of the common stock issued in
connection with the cancellation of such warrant of $2 million recorded in
connection with the issuance of the PFC Note and the subsequent Senior Note.

THREE MONTHS ENDED DECEMBER 31, 2004 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2003

         For the three months ended December 31, 2004, we recorded a gain on the
disposition of the IMAGENT assets of $116,000, resulting from the recording of
the assumption by Imcor of certain of our obligations and settlements with
various vendors and creditors during the period in connection with the IMAGENT
asset sale transaction. For the three months ended December 31, 2003, we
recorded a gain of $513,000, resulting from the recording of payments of
$498,000 from Imcor and settlements with various vendors and creditors of
$15,000 during the period.

         Our revenue decreased to $25,000 for the three months ended December
31, 2004, compared to $47,000 for the three months ended December 31, 2003. This
decrease was primarily due to a decrease in royalties received from sales other
than IMAGENT.

         Research and development expenses increased by $30,000, or 14%, to
$239,000 for the three months ended December 31, 2004, compared to $209,000 for
the three months ended December 31, 2003. The increase in research and
development expenses was primarily due to certain OXYGENT development
activities.

                                       16


<PAGE>

         General and administrative expenses increased by $232,000, or 69%, to
$569,000 for the three months ended December 31, 2004, compared to $337,000 for
the three months ended December 31, 2003. The increase in general and
administrative expenses was primarily due to a $174,000 increase in legal and
accounting fees related to the June Private Placement rescission activities,
including the registration of the stock underlying the Senior Notes and $58,000
increase in public company expenses due to the timing difference between the two
annual meetings.

         Investment income increased by $32,000 to $34,000 for the three months
ended December 31, 2004, compared to $2,000 for the three months ended December
31, 2003. The increase was primarily a result of higher cash balances during the
period because of the receipt of funds from the June Private Placement.

         Interest expense was $160,000 for the three months ended December 31,
2004, compared to $2.1 million for the three months ended December 31, 2003. The
expense for the current period was primarily the result of recording accrued
interest on the Senior Notes. The expense for the prior period was primarily the
result of imputed interest for the estimated fair value of a warrant and BCF
expenses of $2 million recorded in connection with the issuance of the PFC Note
and the subsequent Senior Note.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

         Since inception, we have funded our operations primarily through the
sale of equity securities, payments under our collaboration agreements and debt
financing. From inception to December 31, 2004, we had received $243 million in
net proceeds from sales of our equity securities, $258 million in payments from
collaboration agreements and $74.3 million in debt financing of which $35.6
million of such debt has been converted into equity and $27.3 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock.

         At December 31, 2004, we had approximately $6.3 million in cash, cash
equivalents and investment securities compared to $8.4 million at June 30, 2004.
The decrease resulted primarily from net cash used in operations of $2.2
million, partially offset by $90,000 received from Imcor to fund payments to
vendors. At December 31, 2004, we had a net working capital deficit of $7.4
million, compared to net working capital of $5.9 million at June 30, 2004. Our
operations to date have consumed substantial amounts of cash and are expected to
continue to do so for the foreseeable future.

         Net cash used in operating activities totaled $2.2 million for the six
months ended December 31, 2004, compared to $1.7 million for the six months
ended December 31, 2003. The increase in net cash used in operating activities
during the six months ended December 31, 2004 was primarily due to the increase
in general and administrative costs, primarily professional fees resulting from
the June Private Placement rescission and SEC-related expenses, a payment of
$150,000 to a former landlord pursuant to a settlement agreement, and the
increase in research and development costs, primarily the $100,000 paid to
reacquire certain Astral intellectual property.

         Net cash provided by investing activities totaled $89,000 for the six
months ended December 31, 2004, primarily due to proceeds of $90,000 received
from Imcor to fund payments to vendors. Net cash provided by investing
activities totaled $760,000 for the six months ended December 31, 2003,
primarily due to proceeds from Imcor.

         At December 31, 2004, the following approximate liabilities and debt
obligations were outstanding:

         (a) $1.1 million owed to various vendors, approximately $375,000 of
which is subject to settlements or reimbursements from Imcor;

                                       17


<PAGE>

         (b) $1.4 million in accrued expenses, primarily consisting of $545,000
in rent and related expenses, $200,000 in cash and $420,000 in Astral or
Alliance stock to regain exclusive rights to certain intellectual property, and
$157,000 in payroll and related expenses;
         (c) Senior Notes in the amount of $11.2 million principal and $171,000
accrued interest;
         (d) $1.25 million in deferred royalty payments to be paid through
IMAGENT royalty earn-outs.

         On June 18, 2003, we sold all of our assets related to our IMAGENT
product to Imcor. To date, Imcor has issued $3.7 million of its common stock to
certain of our creditors and made cash payments to us in an approximate amount
of $1.6 million. In addition, Imcor has assumed or we have settled $20.5 million
in liabilities in full satisfaction of $25.9 million of the foregoing debt.
However, $375,000 of such debt is still outstanding and to be paid by Imcor or
settled in accordance with agreements with the various debt holders. If Imcor is
unable to make the necessary payments, these debt holders will have recourse
against us.

         Until we can generate significant continuing revenues, we expect to
satisfy our future cash needs through strategic collaborations, private or
public sales of our securities, debt financings or by licensing all or a portion
of our product candidates or technology. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all. If funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of our research and development programs or our commercialization efforts.

         In June 2004, we completed the June Private Placement, which was
rescinded in September 2004 and replaced with the Senior Notes (as described in
Note 4). The net proceeds to us were approximately $10 million. We believe we
now have working capital to fund our operations for the next 12 months; however,
due to certain restrictive covenants, including, without limitation, a covenant
that the Company maintain at least $5.5 million in cash or cash equivalents on
hand at all times while the Senior Notes are outstanding, the Senior Notes may
become current prior to June 30, 2005. In this event the Company would have to
raise additional funds to repay the Senior Notes or renegotiate their terms.
Therefore, we are seeking additional collaborative research and development
relationships with suitable corporate partners for our products. Further,
additional equity or debt financing may be required to fund our ongoing
operations. Because adequate funds have not been available to us in the past, we
have already delayed our OXYGENT development efforts and have delayed, scaled
back, and/or eliminated one or more of our other product development programs.

         In April 2004, PFC Therapeutics and Il Yang, a leading South Korean
pharmaceutical research and development and marketing company, signed a
licensing, development and marketing agreement granting Il Yang exclusive rights
to promote, market, distribute and sell OXYGENT for any approved clinical use,
including all future approved uses, in South Korea. Under terms of the
agreement, PFC Therapeutics will be initially responsible for the commercial
supply of OXYGENT to Il Yang and will receive a royalty on OXYGENT sales
following commercialization. Il Yang will also make certain future payments on
the completion of various regulatory milestones for development in Europe and
the U.S.

         Also in April 2004, certain secured creditors that accepted an
ownership interest in PFC Therapeutics in satisfaction of Alliance's obligations
and liabilities to such creditors agreed to exchange their ownership interest in
PFC Therapeutics for warrants to purchase shares of Alliance's common stock.

         On December 22, 2004, PFC Therapeutics and LEO signed an Exclusivity
Agreement to enter into a License Agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe and Canada. The terms of
the License Agreement, if entered into, will include certain initial and future
payments to PFC Therapeutics upon the completion of various regulatory and
commercial milestones for OXYGENT development in Europe and royalties on
commercial sales of OXYGENT in Europe and Canada.

                                       18


<PAGE>

WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------

         We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy, information statements and other information regarding
registrants, like us, which file electronically with the Commission.

         We were incorporated in New York in 1983. Our principal executive
offices are located at 4660 La Jolla Village Dr., Suite 825, San Diego,
California 92122, and our telephone number is (858) 410-5200. Our Web site is
under construction.

         Our common stock is traded on the OTCBB under the symbol "ALLP.OB".

CRITICAL ACCOUNTING POLICIES
----------------------------

         There were no significant changes in critical accounting policies or
estimates from those at June 30, 2004.

ITEM 3.  CONTROLS AND PROCEDURES

         (a) Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
CEO and CFO concluded that as of December 31, 2004 our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to the Company (or the Company's consolidated subsidiaries) required to
be included in the Company's periodic filings with the SEC, subject to the
various limitations on effectiveness set forth below under the heading,
"Limitations on the Effectiveness of Internal Controls", such that the
information relating to the Company, required to be disclosed in SEC reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.

         (b) Changes in internal control over financial reporting. There has
been no change in the Company's internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
-----------------------------------------------------

         The Company's management, including the CEO and CFO, does not expect
that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.

                                       19


<PAGE>

PART II OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

         On July 2, 2003, Hub Properties Trust ("Hub") filed a lawsuit in the
Superior Court of the State of California for the County of San Diego against
us, Immune Complex Corporation, Immune Complex, LLC (collectively "Immune
Complex"), and other parties. The suit alleges that the defendants are liable to
Hub for damages stemming from Hub's inability to lease two properties due to
defendants' failure to timely deactivate the radiological materials licenses on
the properties. On August 21, 2003, Immune Complex filed its cross-complaint for
indemnity against us. We have filed a cross-complaint against Hub for damages.
In June of 2004, we deposited $1 million into a controlled bank account as
security for any liability we may incur as a result of the Hub litigation. If
Hub prevails in the litigation, it will be entitled to the funds in the
controlled account up to the amount of the judgment. If the judgment exceeds the
amount of money in the account, Hub may pursue other of our assets. If we
prevail or the judgment is less than $1 million then any money remaining in the
controlled account will be returned to us. Trial is currently scheduled for
March 2005. We believe that Hub's claims are without merit or subject to
defenses; however, we do not know if we will ultimately prevail or if the
outcome of the action will harm our business, financial position or results of
operations.

         On June 13, 2003, we and Imcor jointly brought a patent infringement
action against Amersham Health Inc., Amersham Health AS and Amersham plc
(collectively, "Amersham") in the U.S. District Court for the District of New
Jersey, Civil Action No. 03-2853. The lawsuit alleges that (1) through the sale
of Amersham's OPTISON(R) product, Amersham and its related entities infringe on
eight patents acquired from us by Imcor through its purchase of the IMAGENT
assets; (2) Alliance and Imcor did not and do not infringe any Amersham patent;
(3) Amersham misappropriated confidential trade secrets from Imcor (then
Alliance) when Amersham (then Nycomed) was negotiating a marketing agreement for
IMAGENT; and (4) Amersham is in violation of U.S. Antitrust laws. Alliance and
Imcor are seeking damages and injunctive relief against Amersham. Amersham
counterclaimed for infringement of 12 of its patents and brought counterclaims
against us and our subsidiary MBI asserting breach of contract, breach of good
faith and fair dealing, and tortious interference with contractual relations.
Imcor is paying all costs in this lawsuit, including attorney fees and will keep
any and all damages. Alliance has little financial risk in the lawsuit since all
of the patents at issue and the IMAGENT product are now owned by Imcor. We
believe our claims in this lawsuit have merit and believe Amersham's claims are
without merit and are subject to defenses; however, we do not know if we will
ultimately prevail or if the outcome of the action will harm our business,
financial position or results of operations.

         In December 2001, a lawsuit was filed against MBI in the U.S. District
Court for the Northern District of Illinois. The plaintiff in the action alleged
that MBI breached a license agreement and sought damages and a declaratory
judgment terminating the license agreement, and payment of fees and expenses. In
December 2003, the court entered a judgment in favor of MBI. On January 29,
2004, the court denied plaintiff's motion to amend the judgment. On February 25,
2004, the plaintiff appealed the court's judgment. On January 28, 2005, the
parties settled the lawsuit with MBI paying no money to the plaintiff and
agreeing to return patent rights to the plaintiff in the countries of Japan,
South Korea and Taiwan.

                                       20


<PAGE>

         On February 23, 2001, a lawsuit was filed against us and some of our
officers by two former shareholders of MBI purportedly on behalf of themselves
and others. On March 1, 2001 and March 19, 2001, two additional similar lawsuits
were filed by other former shareholders of MBI. The lawsuits, filed in the U.S.
District Court for the Southern District of New York, allege that our
registration statement filed in connection with the acquisition of MBI contains
misrepresentations and omissions of material facts in violation of certain
federal securities laws. In May 2001, the actions were consolidated. The
plaintiffs are seeking rescission or compensatory damages, payment of fees and
expenses, and further relief. In January 2002, the plaintiffs filed a second
amended complaint adding an additional securities claim against us and the named
officers. In August 2003, the court granted summary judgment as to certain
securities claims and dismissed the claims, and denied summary judgment as to
other securities claims. The parties participated in a mediation in December
2004. The mediation did not result in a settlement, but discussions are
continuing. A trial date of March 23, 2005 has been set in the lawsuit. We
believe that the lawsuit is completely without merit; however, we do not know if
we will ultimately prevail or if the outcome of the action will harm our
business, financial position or results of operations.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         Subsequent to December 31, 2004 and as of February 9, 2005, holders of
certain Senior Notes converted an aggregate of $295,000 in principal amount and
$4,419 in accrued interest into an aggregate of 1,197,674 of our common stock at
a conversion price of $0.25 per share.

         The offers, sales and issuances of these securities were deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder as transactions by the issuer not involving
a public offering. The recipients of the securities represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates or notes in such transactions. All recipients had
adequate access to information about us.

         Our ability to declare or pay a dividend on our capital stock is
restricted for so long as the Senior Notes remain outstanding.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

                                       21


<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         An annual meeting of shareholders of the Company was held on November
11, 2004.

PROPOSAL 1 - ELECTION OF DIRECTORS
----------------------------------

         The following directors were re-elected for the following year and
until the election and qualification of their respective successors:

                                                                         Broker
     Director                     For         Against      Withheld    Non-Votes
     --------                     ---         -------      --------    ---------

Pedro Cuatrecasas, M.D.       22,402,213        0           925,505       0

Carroll O. Johnson            22,366,369        0           961,349       0

Stephen M. McGrath            22,386,140        0           941,578       0

Jean G. Riess, Ph.D.          22,387,709        0           940,009       0

Duane J. Roth                 22,353,441        0           974,277       0

Theodore D. Roth              22,353,423        0           974,295       0


PROPOSAL 2 - AMENDMENT TO 2001 STOCK OPTION PLAN TO INCREASE COMMON SHARES *
----------------------------------------------------------------------------

         The following is the vote approving the Company's 2001 Stock Option
Plan, as amended to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 4 million shares:

                                For               Against            Abstain
                                ---               -------            -------

Beneficial Common             2,009,303         1,490,829            10,161

Registered Common             1,285,119            15,044            30,358

Total Shares Voted            3,294,423         1,505,874            40,519

* Pursuant to New York law, Proposal 2 passed as a majority of the votes cast
was cast in favor of the proposal.

ITEM 5.  OTHER INFORMATION

         None.

                                       22


<PAGE>

ITEM 6.  EXHIBITS

(a) INDEX TO EXHIBITS

         EXHIBIT                        DESCRIPTION

         4.6      Form of Senior Convertible Promissory Note (incorporated by
                  reference to Exhibit 4.6 of the Company's Annual Report on
                  10-KSB for the fiscal year ended June 30, 2004).

         10.76    2001 Stock Option Plan, as amended to date (incorporated by
                  reference to Exhibit 99.1 of the Company's Current Report on
                  Form 8-K filed on January 14, 2005).

         10.77    Exclusivity Agreement dated December 22, 2004 between PFC
                  Therapeutics, LLC and LEO Pharma A/S. * (1)

         31.1     Certification of Chief Executive Officer and President,
                  pursuant to Securities Exchange Act rule 13a-14(a) and
                  15d-14(a) as adopted pursuant to Section 302 of the Sarbanes
                  Oxley Act of 2002. *

         31.2     Certification of Chief Financial Officer, pursuant to
                  Securities Exchange Act rule 13a-14(a) and 15d-14(a) as
                  adopted pursuant to Section 302 of the Sarbanes Oxley Act of
                  2002. *

         32.1     Statement of Chief Executive Officer under Section 906 of the
                  Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

         32.2     Statement of Chief Financial Officer under Section 906 of the
                  Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

       -------------
         o        * Filed Herewith.

         o        (1) Portions of this agreement have been omitted pursuant to a
                  confidential treatment request and have been filed separately
                  with the Commission.

                                       23


<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                         ALLIANCE PHARMACEUTICAL CORP.
                                         (Registrant)
Date:       February 14, 2005            By: /s/   Duane J. Roth
                                             -----------------------------------
                                                   Duane J. Roth
                                                   Chairman and Chief Executive
                                                   Officer



                                         By: /s/   Edward C. Hall
                                             -----------------------------------
                                                   Edward C. Hall
                                                   Chief Financial Officer


                                       24